INVESTMENT FIRMS QUARTERLY LEGAL AND REGULATORY UPDATE

Markets in Financial Instruments Directive
("MiFID")

(i) ESMA peer review report on MiFID suitability
requirements

On 7 April 2016, the European Securities and Markets Authority
("ESMA") published a summary of the key
findings of its recent peer review regarding compliance with the
MiFID suitability requirements (the
"Report").

The peer review took the form of a self-assessment questionnaire
for all Competent Authorities ("CAs").
CAs had 1 year to complete the review, with the review period
running from 1 January 2013 to 31 December 2014.

The purpose of the questionnaire was to capture the possible
different ways CAs determine when investment advice is provided and
how they consistently supervise and enforce the relevant
suitability requirements. The Annex to the report provides a
detailed summary of all replies received from the various CAs.

Overall, ESMA found that while most CAs have a good
understanding of the investment advice market in their
jurisdictions and regularly review the distribution methods and
business models of investment firms, there is scope to adopt more
proactive supervisory approaches and strengthen enforcement
activities.

ESMA found that:

CAs have a good understanding of the types of distribution
methods used in their jurisdictions and where the boundary between
investment advice and information lies. However, limited
supervision was performed to verify whether clients are receiving
investment advice in practice or have the perception that they are
receiving advice;

Most CAs do not perform supervision which is targeted at the
particular behaviour of a firm or group of firms as part of a
specific suitability project;

Most CAs stated they used a wide range of tools to monitor the
main aspects of advice suitability but only a limited number of
regulators provided specific information on the tools they use to
supervise compliance with the suitability requirements;

Enforcement action, such as imposing fines or placing
restrictions on firms' activities, was rarely taken. Many CAs
considered their supervisory approach alone was sufficient to
address issues; and

In many cases, CAs could improve how they publicly communicate
with stakeholders on their supervision and enforcement activities
and findings.

(ii) ESMA publishes and updates Q&A relating to the
provision of contracts for dfferences ("CFDs") and other
speculative products to retail investors under MiFID

On 8 April 2016, ESMA published a new questions and answers
document relating to the provision of CFDs and other speculative
products to retail investors under MiFID (the
"Q&A").

The purpose of the Q&A is to promote common supervisory
approaches and practices in the application of MiFID and its
implementing measures to certain key aspects that are relevant when
CFDs and other speculative products are marketed and sold to retail
clients. It does this by providing responses to questions
identified by CAs in relation to practical aspects of the
day-to-day supervision of firms involved in offering these
products. The Q&As are targeted at CAs. However, the answers
are also intended to help firms by providing clarity on MiFID
rules. The Q&A has been produced with reference to the current
(i.e. MiFID I) legislative framework that is currently in
application. However, it should be noted that the principles and
requirements underpinning the content of the Q&A will remain
unchanged once the MiFID II package, which overall strengthens the
protections for investors, enters into application.

On 20 June 2016, ESMA published an updated version of the waiver
document (the "Waiver Document") that
sets out its assessment of applications for waivers from pretrade
transparency requirements under MiFID.

The Waiver Document is aimed at competent authorities under
MiFID to ensure that, in their supervisory activities, their
actions converge with the opinions provided by ESMA. The examples
are also intended to provide clarity for firms on the MiFID
requirements for pretrade transparency.

In the updated Waiver Document there is a new ESMA opinion
relating to large-in-scale waivers. The new opinion, which is
written in red, provides an example of functionalities that satisfy
the MiFID criteria

On 2 June 2016, ESMA issued a statement (the
"Statement") to all credit institutions
and investment firms, clarifying how these entities should apply
the relevant MiFID requirements governing the distribution of
financial instruments (which are "bail-in-able" under the
Bank Recovery and Resolution Directive 2014/59/EU
("BRRD") resolution regime) to clients,
both on an advised and non-advised basis, as well as in the context
of portfolio management.

In the Statement, ESMA outlines its concerns that, following the
implementation of the BRRD, firms are likely to issue a significant
amount of potentially loss-bearing instruments to fulfil their
obligations and that investors, particularly retail investors, may
be unaware of the risks they may face when buying such
instruments.

ESMA noted that aside from the general duties of conduct, MiFID
contains several provisions which apply to firms when selling or
advising on the sale of financial instruments, including those
subject to the resolution regime, or providing portfolio
management, namely:

On 4 April 2016, ESMA published its risk assessment on the
temporary exclusion of exchange-traded derivatives
("ETDs") from Articles 35 and 36 of the
Markets in Financial Instruments Regulation
("MiFIR").

Article 35 of MiFIR requires CCPs to provide access to trading
venues on a nondiscriminatory basis to clear transactions executed
on different trading venues. Article 36 of MiFIR requires trading
venues to provide access on a non-discriminatory basis, including
trade feeds, to CCPs that wish to clear transactions executed on
these trading venues. Under Article 52(12) of MiFIR, the European
Commission is required to report to the European Parliament and the
Council of the EU on assessments of the need to temporarily exclude
ETDs that require open and non-discriminatory access to CCPs and
trading venues from the scope of Articles 35 and 36 of MiFIR.

The report prepared by the European Commission will be based on
a risk assessment carried out by ESMA and had to be submitted by 3
July 2016. Depending on its conclusions, the European Commission
may adopt a delegated act to exempt ETDs from the scope of Articles
35 and 36 of MiFIR for up to 30 months following the date MiFIR
enters into force.

Articles 35 and 36 of MiFIR establish that CAs may only grant
access to a particular CCP or trading venue where granting access
would not: 1) require an interoperability agreement for ETDs, or 2)
threaten the smooth and orderly functioning of the market, in
particular due to liquidity fragmentation, or would not adversely
affect systemic risk.

In its risk assessment, ESMA provides an overview of the market
for ETDs and of existing access arrangements in the EEA including
any potential benefits and risks stemming from open access
provisions for ETDs. It concludes that the possible risks stemming
from access related to ETDs are already appropriately covered in
Article 35 and 36 of MiFIR and the draft RTS on access to CCPs and
trading venues and consequently does not recommend that ETDs should
be temporarily exempted from the scope of Articles 35 and 36.

The Delegated Regulation aims at specifying, in particular, the
rules relating to exemptions, the organisational requirements for
investment firms, data reporting services providers, conduct of
business obligations in the provision of investment services, order
execution rules, client order handling, small and medium-sized
enterprises ("SME") growth markets,
thresholds above which the position reporting obligations apply and
the criteria under which the operations of a trading venue in a
host Member State could be considered as of substantial importance
for the functioning of the securities markets and the protection of
the investors.

The Delegated Regulation is based on final technical advice on
the MiFID II Directive that ESMA provided to the European
Commission in December 2014 (the Council of the EU has decided not
to object). The European Parliament will now consider the Delegated
Regulation and – if cleared without objection – the
Delegated Regulation will enter into force 20 days after its
publication in the Official Journal of the EU, applying from the
date that the MiFID II Directive applies (3 January 2018).

(iii) European Commission adopts Delegated Regulation
for determination of market material in terms of liquidity relating
to trading halt notifications

On 26 May 2016, the European Commission adopted a Delegated
Regulation (C(2016) 3020 final) supplementing the MiFID II
Directive with regard to RTS for the determination of a material
market in terms of liquidity relating to notifications of a
temporary halt in trading (the "Delegated
Regulation").

Under Article 48(5) of MiFID II, Member States must require a
regulated market to be able to halt or constrain trading if there
is a significant price movement in a financial instrument on that
market or a related market during a short period and, in
exceptional cases, to be able to cancel, vary or correct any
transaction that took place. The parameters used for deciding to
halt trading and any material changes to those parameters must be
reported to the competent authority, which in turn must report them
to ESMA. This requirement is extended to multilateral trading
facilities ("MTFs") and organised
trading facilities ("OTFs") by virtue of
Article 18(5) of MiFID II.

In this context, Article 48(12)(d) of MiFID II Directive
requires ESMA to develop draft RTS further specifying the
determination of where a regulated market is material in terms of
liquidity in a given instrument for that market. The draft RTS were
submitted to the European Commission on 28 September 2015.

If the Delegated Regulation is adopted by the European
Parliament without objection (the Council of the EU has already
decided not to object to it), it will enter into force 20 days
after publication in the Official Journal of the EU and it will
apply from the date appearing in the second sub-paragraph of
Article 93(1) of MiFID II (3 January 2018).

(iv) European Commission adopts Delegated Regulation on
RTS criteria for determining whether derivatives subject to
clearing obligation should be subject to trading
obligation

On 26 May 2016, the European Commission adopted a Delegated
Regulation (C(2016) 2710 final) supplementing MiFIR with regard to
RTS on criteria for determining whether derivatives subject to the
clearing obligation should be subject to the trading obligation
(the "Delegated Regulation").

MiFIR lays down a trading obligation applicable to non-intra
group transactions in sufficiently liquid contracts when traded by
counterparties subject to clearing under EMIR. The application of
the trading obligation is defined under Article 32 of MiFIR, which
outlines the process for deciding which derivatives should be
declared subject to mandatory trading.

Once a class of derivatives has been mandated as subject to the
clearing obligation under EMIR, ESMA must determine whether those
derivatives (or a subset of such) should be subject to the trading
obligation, meaning they can only be traded on a regulated market,
MTF or OTF. Whether or not a class of derivatives subject to the
clearing obligation should also be made subject to the trading
obligation will be determined by the venue test (the class of
derivatives must be admitted to trading or traded on at least one
admissible trading venue) and the liquidity test (whether the
derivatives are "sufficiently liquid") and there is
sufficient third party buying and selling interest.

The Delegated Regulation provides clarity in the determination
of a class/subset of class of derivatives that is sufficiently
liquid. Article 2 specifies the criteria with respect to the
average frequency of trades, Article 2 sets out the average size of
trades, Article 4 details the number and type of active market
participants and Article 5 notes the average size of spreads.
Together, these indicate the level of third-party buying and
selling interest, laid out in Article 1.

The Delegated Regulation is subject to consideration by the
European Parliament and the Council of the European Union. Once
final, the adopted RTS will apply directly across the EU from the
date that MiFID II applies (3 January 2018).

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